2 Big Inflation Reports May Affect Fed's Interest-rate Decision

The Federal Reserve's rate-making group will meet Dec. 17 and 18, when they may decide to cut the central bank's key interest rate for a third time this year. 

In fact, one widely watched indicator, the CME Groups FedWatch tool puts the odds of a rate cut at 86%.

????Don’t Miss this amazing Black Friday Move! Get 60% off TheStreet Pro. Act now before it’s gone ????

But two reports coming up in the week ahead could derail the rate cut: 

The Consumer Price Index report for November, due Wednesday, and the November Producer Price Index report for November, due a day later, will be closely scrutinized. If the reports suggest inflation is stronger than expected, the Fed could leave its key Federal Funds rate at 4.5% to 4.75% and delay another rate cut until next meeting on Jan. 28-29. 

Related: Veteran trader revamps Palantir stock price target on Nasdaq move

The issue is stickiness. Here's what it means.

In 2022, the Fed started to boost interest rates to beat down inflation, which had hit the highest levels since the 1980s. Its goal was to bring overall inflation down to 2% a year. 

The CPI reached an annualized 9% in the summer of 2022 and now is about 2.6% a year. But the problem is the inflation level hasn't moved much in months. 

Strip out food and energy costs (both have been falling in recent months), and what's called the core CPI is rising at roughly 3.3% a year. That's also concerning.

The villains in this scenario are:

• Shelter, especially rents, running at about 5% a year.
• Food away from home. Running at 3.8% a year. (Think your favorite fast-food restaurant.) 
• Services, especially transportation, up 4.8% on a year-over-year basis.

Rents are starting to come down, but the changes are modest at best. Home prices, as everyone knows, continue to rise. Mortgage rates are running at 6.8% or so, down from 8% in October 2023 but up from 6.1% in September.

Eating out is shocking for those who don't do it much. And airfares are not coming down. 

If these three areas are especially hot on Wednesday and on Thursday, the result could be a lot of volatility in stock and bond markets. The Fed's Open Market Committee, the body charged with making rate decisions, may have to rethink their policy.

A busy earnings week

In addition to the two-day CPI/PPI tangle, the week also faces some big earnings:

• Oracle  (ORCL) , reporting Monday afternoon. Earnings are projected at $1.48, up from $1.34 a year ago. Revenue estimate: $14.12 billion, up 9.1% from $12.94 billion a year ago. 2024 share price change: 81.9%.
• Auto parts retailer AutoZone  (AZO) , reporting Tuesday morning. Earnings estimate: $33.54, up from $32.55 a year ago.  Revenue estimate: $4.31 billion, up 2.86% from a year ago's $4.19 billion. 2024 share price change: 27%
• Software giant Adobe  (ADBE) , reporting after Wednesday's close. Earnings estimate: $4.67, up from $4.27 a year ago. Revenue estimate: $5.54 billion, up 9.7% from a year ago's $5.05 billion. 2024 share price change: -7.31%.
• Chipmaker Broadcom  (AVGO) , reporting after Thursday's close. Earnings estimate: $1.39, up 25% from a year ago. Revenue estimate: $14.07 billion, up 51.3% from a year ago. An AI player. 2024 share price change: 61%.
• Costco Wholesale  (COST) , reporting after Thursday's close. Earnings estimate: $3.80, up from $3.58 a year ago. Revenue estimate: $61.1 billion, up 7.4% from a year ago. Shares are up 54% in 2024 and have seen eight new 52-week highs since Oct. 23.

Bloomberg/Getty Images

A hint of unease in markets

The Dow Jones Industrial Average fell 0.6% last week, only its second weekly decline in the last five weeks. The index was down four of five days and ended at 44,643. That leaves the index still up 18.5% on the year. 

The Standard & Poor's 500 Index added about 1% to 6,090, its smallest weekly gain in the last three weeks, though the index is still up 27.7% for the year. The Nasdaq Composite Index experienced a robust gain of 3.34% for the week — its best gain since the week of Nov. 4, the week when Donald Trump won another term as president. 

If you listened to business news or read the financial press, you sensed a worry the rally is slowing.

Reasons for the unease: 

The gains were narrow. In the aftermath of Donald Trump's win over Kamala Harris, just about everything seemed to shoot higher. This past week, only three S&P 500 sectors were higher:

• Consumer Discretionary. The leader: Tesla  (TSLA) , up 12.8%.
• Communication Services. The leader: Netflix  (NFLX) , up 5.4%. 
• Information Technology. The leader: Super Micro Computer  (SMCI) , up 34.6%.

Stress for businesses in vulnerable industries. These include trucking companies, fast-food restaurants  and coffee shops. Business bankruptcies commenced, terminated or pending totaled 504,112 for the 12 months ended Sept. 30. That's up 16% from a year earlier.

More Wall Street Analysts:

• Top analysts unveil their S&P 500 forecasts for 2025
• Analysts overhaul MicroStrategy stock price target amid bitcoin rally
• Google analysts sent scrambling by startling break-up news

Lower oil prices hit energy stocks. Crude is down 6.2% this year.  Oil prices are seen being weak in 2025 because of slowing economic activity in China and Europe. U.S. gasoline prices peaked in April at $3.679 a gallon. They've fallen 18% since to $3.02, a three-year low, and should end the below $3.

Stocks are approaching overbought levels. Twice this week, the Nasdaq Composite's relative strength has topped 70, and the S&P 500's RSI topped 70 once. Relative strength is a measure of stock price momentum. Above 70 suggests a stock or an index is getting frothy. The Dow, S&P 500 and Nasdaq have not seen RSIs above 70 since July when at different times, each topped 80, and stocks did fall back for a little time. The current situation is benign but worth watching.

Related: Jobs report stokes more bets on December Fed interest rate cut

Health stocks overall are knocked down 

The S&P 500 health sector index has been the weakest performer in the overall index. It fell 0.5% on Friday and was off 2% for the week. The index is also off 8.6% from its 52-week high reached on Sept. 3. 

The good news is that the index is still up 9.4% since Dec. 6, 2023. 

One reason for this week's decline was a near-10% decline in shares of health-insurance giant UnitedHealth  (UNH) . UnitedHealth fell back in part because the company forecast that rising medical costs will rise and hurt earnings in 2025. 

But there was great shock over the murder of UnitedHealth executive Brian Thompson in New York City. The suspect has not been apprehended. 

Surprisingly, the crime unleashed a flood of anger and frustration at the power health insurers hold in healthcare decisions, The Wall Street Journal, The New York Times and others noted.

The most contentious issue is prior authorization, which requires patients and doctors to get permission from the patient's health insurers before a medical procedures can be performed. The Journal reported that an American Medical Association survey said a quarter of doctors believe the practice has led to adverse outcomes for patients.

The health insurance industry was hoping the incoming Trump administration would reduce regulations generally. There's a good chance there will be large fights over some of these practices. 

Related: Veteran fund manager delivers alarming S&P 500 forecast